At the end of 2017, Montvale Associates borrowed $120,000 from the Bayliner Bank. The debt covenant specified
Question:
At the end of 2017, Montvale Associates borrowed $120,000 from the Bayliner Bank. The debt covenant specified that Montvale’s debt/equity ratio could not exceed 1.5:1 during the period of the loan. A summary of Montvale’s balance sheet after the loan follows.
2017
Assets
Current assets .....................................................................................$130,000
Non-current assets ...............................................................................350,000
Total assets ..........................................................................................$480,000
Liabilities and Shareholders’ Equity
Current liabilities ................................................................................$130,000
Long-term liabilities .............................................................................150,000
Shareholders’ equity ............................................................................200,000
Total liabilities and shareholders’ equity .........................................$480,000
a. Compute Montvale’s debt/equity ratio immediately after the loan.
b. How much additional debt can the company incur without violating the debt covenant?
c. How large a dividend can the company declare and pay at the end of 2017 without violating the debt covenant?
d. If Montvale had declared, but not yet paid, a $20,000 dividend before it took out the loan, could the
company pay the dividend afterward without violating the debt covenant? Why or why not?
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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a DebtEquity Ratio Total Liabilities Total Shareholders Equity 130000 150000 200000 140 b The maximu...View the full answer
